In Florida, oftentimes right before a residential real estate transaction is set to close the deal is derailed because of conflicting legal interests between the parties to the transaction (the seller and the buyer) and a third party with an interest in the property.
Who are these third parties? Two common examples: contractors who have worked on the property and have filed a lien in the public records to make sure they get paid and someone who claims to be a “bona fide purchaser” of the property (more on that later).
Key here: the closing can not occur (because the seller can’t convey marketable title) until these title issues are resolved and that may mean someone is going to have to pay some money to get these title issues resolved. Below are a few examples of common and some not-so-common tile issues that can arise during a title search and prior to closing. (Also see our prior article: 3 Types of Title Issues That Can Impact a Florida Real Estate Closing.)
1. Legal Notice: What’s in the Records?
Florida has a recording law that acts to protect people from secret conveyances, silent deals, and other schemes that can affect ownership to real estate. It is found in Florida Statute Chapter 695. One of the big reasons for having official real estate records in the county where the property is located — so anyone interested in a specific piece of real estate can learn if there are any “clouds” on that title as well as creating a cloud themselves if need be.
What happens here? Let’s say there is a pending sale. This fact may or may not be known to the third party that is claiming an interest in the property. For instance, the contractor that is in the process of replacing the garage doors.
If the deal closes, then who pays that garage door contractor — the seller who hired him or the buyer who is enjoying his product?
Under Florida’s recording law, the title to the home is not marketable if the garage door contractor followed the law and filed a notice in the public records that it has performed services to improve the property. If the contractor’s notice isn’t addressed (meaning, for example, a release of lien is obtained and recorded), then the notice acts as actual or constructive notice to these third parties — like a buyer — that there is a potential cloud on the title. That potential cloud on title will likely prevent the transaction from closing until it is removed because the contractor has a superior interest in the property to the interest of any buyer (and the bank lending money to the buyer).
2. Common Source of Title: We Both Have a Deed!
In Florida, we also have something called the “common source of title” legal doctrine. Here, there’s a conflict when two parties both claim title to the real estate from a single source. Under this law, the party that can provide evidence of better title from that single source will be given legal title to the property.
For instance, in the case of Nissim Hadjes, Inc. v. Di Costanzo, 197 So. 2d 602 (Fla. 3d DCA 1967), both Nissim Hadjes, Inc and Nicholas Di Costanzo claimed they held legal title to a piece of Florida real estate, each claiming they obtained title from a common source — the Richards Land Development Corporation.
Each side had a deed. Mr. DiCostanzo claim was based upon a warranty deed he had from the Richards Land Development Corporation “to Nicholas Di Costanzo, as trustee,” which was recorded in the real property records in May 1958, as well as a quitclaim deed from Nicholas Di Costanzo, as trustee, to Nicholas D. Costanzo (plaintiff), which was also recorded in the land records (several years later).
Nissim Hadjes, Inc had a deed, too. It argued it had legal title because of a warranty deed from Richards Land Development Corporation to Nissim Hadjes, Inc which was recorded in September 1958.
The court held that since both parties were claiming title from a common source, they had the burden of proving they had a better title from that source to prevail. To do so, they needed to trace their actual legal title to the common source — and show more than they each had a claim under a common source.
Based upon the testimony and documents provided, the court found that the trust deed from Richards Land Development Corporation to Mr. DiCostanzo, as a Trustee, was, in fact, a mortgage and not a conveyance of clear title. Accordingly, Nissim Hadjes, Inc held better title evidence and was held to hold title to the land.
3. What the Buyer Knew and When He Knew It
When someone decides to buy real estate in Florida and takes title to that real estate knowing that there are prior claims on that property, then that buyer is bound by those claims. See, Barnhill v. Lowe, 940 So. 2d 462 (Fla. 1st DCA 2006) (actual or constructive knowledge).
For instance, there may be a covenant within the deed itself that stipulates that the grantee (buyer) assumes a specific debt against the land as part of the sale and purchase price. That covenant will legally make the buyer liable for that debt. The buyer does not have to sign any document that he or she agrees to pay the debt; by paying the purchase price and taking the deed, the buyer has accepted responsibility for the indebtedness.
Why? The buyer is considered to have notice of the debt and to have agreed to pay it off because of the language in the deed document. See, Shirey v. Dowling, 155 Fla. 433, 20 So. 2d 500 (1945).
4. Innocent Purchaser for Value
In Florida, a buyer of a home or condo takes that real estate title free of any outstanding equitable interests of third parties if he is considered an “innocent purchaser for value.” What is an innocent purchaser for value? It’s a buyer who has no idea that these outstanding equitable interests exist. He has no notice of them. Herring v. Fitts, 43 Fla. 54, 30 So. 804 (1901).
When a buyer has notice of someone else’s interest in the real property, then the buyer legally takes ownership and title to that land subject to those interests. If the buyer has notice, then he has a duty to deal with those interests.
However, a buyer who is considered a “bona fide purchaser” takes the property free from them. Smith v. Massachusetts Mut. Life Ins. Co., 116 Fla. 390, 156 So. 498, 95 A.L.R. 508 (1934); Broche v. Cohn, 987 So. 2d 124 (Fla. 4th DCA 2008), cause dismissed, 994 So. 2d 304 (Fla. 2008).
In Broche v. Cohn, Diosdado Broche and John Cohn entered into a verbal contract to form a company called Island Motors, Inc which would sell used cars. Island Motors was in the real estate records as title owner; Broche was the one who paid the money for the land. All the corporate documents had John Cohn listed (as CEO, president, etc.) because Mr. Broche didn’t want to have his name listed anywhere.
Things went badly for the business partners. Within a month of the company being formed, Mr. Broche issued 51 shares to himself and 49 shares to his wife in Island Motors stock; that next February, he transferred the land from Island Motors to himself and his wife in a quitclaim deed. He recorded this deed.
Mr. Cohn quickly went down to the courthouse and recorded his own deed — this one transferred the land from Island Motors to John Cohn. He issued all the shares in the company to himself, too, and then filed a Notice of Lis Pendens in the land records — and sued Broche.
The lawsuit was ongoing when Mr. Cohn, signing on behalf of Island Motors, signed a sales agreement to sell the real estate to a buyer named Warren Mosler.
When Mosler’s title search was run, it showed that Island Motors held legal title to the land and that John Cohn was the president and sole officer of Island Motors. The title search also showed Mr. Broche’s recorded quitclaim deed along with Cohn’s Notice of Lis Pendens.
Cohn explained away Broche as a “disgruntled employee” whose claim for the land was phony (fraudulent). The title company requested that Cohn dismiss his lis pendens and that Cohn agree to indemnify the title company for any claim brought by Broche. The sale to Mosler closed; he recorded a warranty deed and Cohn was paid his purchase price.
Did Mosler have notice of Broche’s claim?
The court held that Mosler purchased the land with the knowledge that Broche had a claim, and therefore he had legal notice of Mr. Broche. Under Florida law, this meant that Mosler took the land subject to an outstanding equitable interest – if that is what Mr. Broche held. The court found that because the land was held in the name of Island Motors, it was the sole owner of the land. Broche had no equitable interest in the property.
Mosler was held to be legally entitled to the property as an innocent purchaser for value. Broche, Cohn, and the company Island Motors could work out their claims as against each other in other ways (including Cohn putting the purchase money he got from Mosler into the company’s accounts). Mosler was a “Bona Fide Purchaser” under Florida law and as such, took legal title to the land free from these claims. (More on Bona Fide Purchasers in our next post.)
Closing Questions? Concerned About a Possible Title Issue?
If you are finding your closing is becoming complicated because of a possible conflict involving a third party’s interest in the real estate — or if you are a third party who is concerned that a sale may harm your ability to be paid on an outstanding debt, then it’s important that you be proactive and learn your rights under Florida law.
Calling an experienced Florida real estate lawyer for advice can be vital to protecting your interests. It’s possible that your lawyer may be able to find a way of addressing the title issue without the need for filing a title insurance claim or a complicated lawsuit, which will likely kill the transaction or, at the very least, cost a lot of time and money to pursue.
A good piece of advice if you are involved in an issue related to a cloud on title to real estate, is to at least speak with an experienced Florida real estate lawyer to learn about your rights. Most real estate lawyers, like Larry Tolchinsky, offer a free initial consultation (over the phone or in person, whichever you prefer) to answer your questions.
- Title Insurance and Closing Your Florida Home Purchase
- How Do You Know If The Chain Of Title To Your Florida Real Estate Is Clear?
- How Important is Title in a Florida Residential Real Estate Closing?
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